Posted on 08/22/2008 6:05:20 AM PDT by 300magnum
We've all read that speculators are driving oil prices artificially high — a claim that gets more interesting in light of oil's recent fall below $115. But maybe we're looking at it from the wrong perspective. Suppose that major suppliers in the oil industry are these manipulative speculators.
Is it possible that oil prices are rigged? You bet. Here's how:
Just how would you raise prices if you were an oil supplier? Controlling the supply — as in the 1973 OPEC embargo — has become less effective with more sources of oil worldwide. And oil suppliers clearly cannot raise prices by controlling demand in the physical oil market; ultimately, they need to sell their oil, not buy it. However, with the market inefficiencies that we expose here, oil suppliers can regain the upper hand by artificially inflating demand using a different market. To understand this mechanism, we must take a glimpse into the future — the futures market, that is.
The price of oil reported in the news is actually the price of oil in the futures market. In this market, traders do not exchange physical barrels of oil, but instead trade contracts which obligate them to exchange oil at a quoted price at a specific date in the future, usually months in advance. Such a contract allows companies to hedge positions by locking in prices early. Airlines might buy futures contracts to reduce their exposure to rising fuel prices. Conversely, oil companies might sell futures contracts to assure a profit against future price drops. It's all about reducing risk and uncertainty. But what if oil suppliers were instead buying oil futures, compounding their own risk and reaping enormous profits from the explosion in the price of physical oil?
The futures market has become the public driving force in pricing
(Excerpt) Read more at time.com ...
The last line of the posted article says they “study” financial mathematics and material science and engineering at Stanford. Google them. I get their fraternity web pages. I think they are undergraduates.
I made my posting by copying the last line from the TIME article at 9:12 am.
So between 9:12 am and when you read the TIME article, TIME changed the words to say the authors “study”.
I can understand Time making a simple mistake in their original posting of the article by saying the authors teach. But I am also suspicious that Time was taking a bunch of heat about the article and so to downplay it they made them students.
Whether the authors are teachers or students, it does show the impact our Democrat controlled schools are having upon the education system.
“””Ari J. Officer teaches financial mathematics at Stanford University. Garrett J. Hayes teaches materials science and engineering at Stanford University
5 posted on Friday, August 22, 2008 9:12:06 AM by Presbyterian Reporter “”””””
...The feds “rig” everything. The deficit, the economic status, the ressesion, the depression, everything. It’s a lie and an illusion...
Prices are ultimately set in the primary market. In commodities, that refers to producers.
Well, you need to give a “rat’s butt” about oil companies, because fear-mongering about their activities is one of the primary factors that empower demogogues/politicians (especially Democrats). Anti-trust legislation designed to preserve competition is agreeable, but too often the economically-ignorant consumer slits his own throat by entertaining ridiculous policies like windfall-profit taxes, “price-gouging” legislation, nationalizing the oil industry, government-mandated price-ceilings, etc., etc. Politicians are all too eager to pander to anxiety about “Big Oil”.
I’m not sure what you mean by, “the majority of price has nothing to do with Oil Companies”. They are half of the price-determining function. The sum total of their input costs determines the bare minimum price they can charge at the current level of output.
The Hunt brothers did that with silver back in the late 70s early 80s and I think some other folks have done it with some other commodities.
I think the key in all cases was The underlying physical product has to be in short supply. You have to squeeze the shorts by making them run the risk of not being able to deliver on their contracts.
I think if you can do this you can rig a futures a market. If not you can't for the reasons set forth above.
In the case of oil I don't think you can possibly control the underlying physical commodity. IOW, eventually the rubber has to meet the road.
THAT is a big story. Time is so desparate, they use cheapo writers like students. Pathetic. It is now all over the internet that these “professors” say oil is rigged.
These undergrads now have it on Wikipedia!
How did they get the credentials to teach those subjects? $100 sent over the Internet for a degree?
People look at the numbers and think that the price of oil is the only component of the price of gasoline. If the price of oil were to go to $0 then the price of gasoline should be $0.
I remember that it went briefly below $10 but I don’t remember how far below. That was repeated in the press over and over.
Observing the price of gas hereabouts I have noticed that it does, indeed go up when oil goes up unexpectedly and there is some reason divined for that, like Katrina. On the other hand gasoline has been declining steadily here, even when oil bounces up. Tracking the prices day by day it would be hard to make any sort of close relationship. There are store/stations that sell pretty much at cost or even a tad below cost because gasoline is what brings people into their stores. Those stations limit the amount that other stations can raise their prices. A friend's store makes essentially nothing on the gasoline it sells after subtracting the drive-offs but it brings people into his store to pay his inflated prices on convenience store stuff. He won't go to pre-pay because he thinks it will reduce his customer base. There are also stations that charge 10-20 cents higher prices than the norm and I see their lots empty whenever I drive past. I sometimes wonder just what business those fellows are actually in.
What’s really pathetic about all this is that no one on this damn thread is actually arguing against what the authors of the article are actually saying. Am I the only person here who actually read the damn article?
All the article is saying is that the vast majority of oil the world consumes is bought by OIL COMPANIES by OIL PRODUCERS (not the same thing, dammit!) in PRIVATE DEALS. Because these deals are private it is hard to reach a universal, publicly known price. That is purpose the futures market serves. The futures market helps determine the price of oil for the PRIVATE DEALS. Because the futures market is small, however, it can be cornered. Why is this so friggin’ hard to understand. If 9 billion dollars can buy up all the contracts in the futures market, it’s obvious that the market can be swayed in one direction or the other. And because the OIL PRODUCERS have a lot of money, why not try to sway this price.....THEIR PRIMARY OBJECTIVE IS NOT TO MAKE MONEY ON THE FUTURES MARKET - THEY ARE ONLY TRYING TO DRIVE UP THE PRICE OF OIL BECAUSE THEY WILL MAKE MORE IN ANOTHER MARKET!!! THE FUTURES MARKET DICTATES THE PRICE FOR THE OTHER, MORE PRIVATE MARKET. They are leveraging the futures market against the REAL market for oil. Do you guys honestly think that the futures market IS the market used by OIL COMPANIES when they want to buy oil to refine?? GO To NYMEX.com and take a look at how much oil is ever delivered - it’s close to nothing!! You people clearly didn’t read the article, and are only trying to make this a political issue. Why don’t you go to their wikipedia page and read what the Officer-Hayes Hypothesis is really saying. You’ll learn something from it.
http://en.wikipedia.org/wiki/Officer-Hayes_Hypothesis
People, people, people...
I don’t know. I only found it in a roundabout way, and have frankly little interest in it. I am open to either idea at this time, it is “fixed” or it is not.
We read the article, pal. We understand fundamentally what they are trying to say. Many of us don’t buy it. Thank you for creating a logon just yesterday to inform us of our errors. This article was given a response by BobbyT (just a few posts earlier). I’m going to paste it again, because it eloquently states just why the article’s hypothesis doesn’t work:
This argument doesn’t hold water. It’s like claiming Ford can make money by buying up Ford stock.
As a trader tried to bid oil futures past market levels, he’d be spending more and more to inflate the price. To make money he has to be able to sell back all the contracts he bought at above-market prices.
That can only happen if his play was fundamentally correct and other traders agree the price should be there...meaning there wasn’t anything “artificial” about the move and nothing was “inflated”, it was just the old price moving to the market price.
If he’s truly artificially inflating the futures, he’ll then be long a ton of expensive contracts as sellers step in to take advantage of the idiotic prices being bid. The price gets slammed back down where it belongs, and he loses.
Oh and if he’s doing it enough to significantly move the market, that means his position is massive, and traders will notice. Traders being the vicious bunch they are will attack the huge long position once they spot it, aggressively selling because they know the guy behind it is probably highly leveraged, meaning his loss gets substantially bigger at each price move...that means he has little room for error, and as soon as traders start to hammer it he’ll exceed his margin and have to puke his position for a massive loss (in doing so, letting the traders who sold against him buy their shorts back cheap and make money...their reward for forcing the market back to efficiency).
You can’t both build up a position big enough to move a market AND be able to liquidate out of that position for a winner. It’s like thinking you can make money by buying your own product if you just buy enough of it...or powering your house with a fan pointed at a windmill.
Howdy there, nube.
Bishop,
wrong again. You didn’t get the point. What the article is saying is that the futures price determines the price in the physical, more private market. Because the futures market is small, it can be manipulated. The oil producers don’t care about making the money in the small (futures) market. They might as well lose money in futures market. They make their real money in the physical market. It’s like this...the futures market is a 9 billion dollar market. The physical market is more than 100 times that size. If you are an oil producer....why not screw around with the small, 9 billion dollar market in an attempt to influence prices in the BIGGER market? A little money wasted in the small market (not selling off ones positions - perhaps taking delivery of the oil thereby keeping the contracts off the market) means high prices in the other. Its leverage with a kick ass mechanical advantage ratio.
And those sellers of oil you mention?? Who might they be? Other oil producers?? Why on earth would they want to short the oil?? They are also making money by the new high prices. it is not necessarily in their interest to short the oil.
I understand the Ford stock analogy. That makes perfect sense. But the point here is that the oil producers don’t care about making their cash in the futures market - they care about making their money in a DIFFERENT market - the physical oil market. They screw with the small market to set up better prices in the bigger market. The small market is cheap to screw around with.
The Ford stock traders ARE concerned with making money IN the Ford stock trading market. The Oil contract traders ARE NOT concerned with making money in the Oil Contract trading market.
It does stink that this has become politicized (not accusing you, but previous posts).
Methinks you posted to the wrong Freeper.
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